Dutch auction

A Dutch auction is a type of auction in which the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneer's price, or a predetermined reserve price (the seller's minimum acceptable price) is reached. The winning participant pays the last announced price. This is also known as a clock auction or an open-outcry descending-price auction.

This type of auction is convenient when it is important to auction goods quickly, since a sale never requires more than one bid. The Dutch auction guarantees that the best possible price is obtained, in contrast to a traditional auction where the winning bidder may have been prepared to bid considerably more.

In a Dutch auction, the item being sold is initially offered at a very high price, well in excess of the amount the seller expects to receive. Bids are not sealed, as they are in some types of auctions. The price is lowered in decrements until a bidder accepts the current price. That bidder wins the auction and pays that price for the item. For example, suppose a business is auctioning off a used company car. The bidding may start at $15,000. The bidders will wait as the price is successively reduced to $14,000, $13,000, $12,000, $11,000 and $10,000. When the price reaches $10,000, Bidder A decides to accept that price and, because he is the first bidder to do so, wins the auction and has to pay $10,000 for the car.

Dutch auctions are a competitive alternative to a traditional auction, in which bids of increasing value are made until a final selling price is reached, because due to ever-decreasing bids buyers must act decisively to name their price or risk losing to a lower offer.

There is some confusion over terminology. Some financial commentators and some third-party auction sites use the term Dutch auction to refer to second-price auctions, which are different from Dutch auctions.

In a second price auction the seller offers more than one identical item for sale so that there may be more than one winning bidder. Each bidder can bid for all the items or only some of them and publicly indicates the price that he/she is willing to pay for each item. All winning bidders, however, need only pay the lowest qualifying (successful) bid. Priority goes to the bidders who submitted their bids first if there are more successful bids than items available.

In order to beat a competing bidder one must bid a higher price per item than that competitor, regardless of the number of items that are being bid for. Here is an example of how this might work:

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